Austerity measures reintroduced

ISLAMABAD:

Interim Prime Minister Anwaarul Haq Kakar has approved new fiscal austerity measures, including a ban on creating new positions and major purchases. However, the impact of these measures may be limited, as the government spends more than its total net income just on interest payments.

A complete ban on creating new posts under the Public Sector Development Programme (PSDP) and the current budget for the fiscal year 2023-24 has been approved by the government.

The caretaker PM approved the austerity measures almost four months before the end of the current fiscal year 2023-24, which is ending in June. Usually, the policy is approved at the start of the fiscal year, but the interim government approved it a week before the end of its term in office.

Additionally, the prime minister has banned the purchase of machinery and equipment from the current budget, except for medical purposes, according to the notification.

However, certain development projects have been initiated in the name of capacity building but are used for meeting the personal needs of bureaucrats and politicians, according to sources. Funds allocated for these projects have been misused for buying food, furniture and other personal items for bureaucrats.

Moreover, the PM has banned the purchase of all vehicles except for ambulances, buses for educational institutions, solid waste vehicles, tractors, fire-fighting vehicles, and motorbikes, according to the decision.

Some caretaker cabinet ministers are reportedly using luxury vehicles above their entitlement of 1,800 cc cars, according to sources. They added that one such vehicle was provided by the Customs Department, and millions of rupees were spent by a collectorate of Customs.

For the current fiscal year, the National Assembly had approved a Rs14.4 trillion budget and a budget deficit of Rs7.5 trillion. However, this week, the finance ministry upwardly revised the budget deficit target to Rs8.5 trillion, primarily because of an increase in estimates of interest payments. As a result, the size of the budget would grow to Rs15.5 trillion.

Interest expenses have now been estimated at Rs8.333 trillion, compared to the annual allocation of Rs7.3 trillion.

During the first half of this fiscal year, the government spent Rs4.219 trillion on interest payments, a sum that was Rs219 billion more than the federal government’s net income during this period.

Past austerity policies have not helped achieve fiscal consolidation, often being relaxed after their approval.

While approving the new austerity policy, the PM also constituted an Austerity Committee to relax these measures.

The austerity committee will ensure implementation of the measures while being empowered to relax the policy, as per a notification issued by the Ministry of Finance.

Read Rs462b K-P budget seeks to promote strict austerity

The finance minister will chair the Austerity Committee, with members including the secretaries of finance, planning, and interior, along with the special secretary of the Cabinet and an additional secretary of finance.

This month, PM Kakar approved three-month salaries as a reward for his staff serving in the office and house. Subsequently, the PM decided to restrict the benefits to grades 1 to 16. However, sources suggest that there was pressure on the PM to restore the reward for officers serving in the internal wing of the Prime Minister House.

Pakistan is facing serious fiscal challenges, and cosmetic austerity measures may not be able to address the issue. The country cannot emerge from the fiscal crisis until it restructures public debt and reduces interest rates. Tax reforms are also necessary, as efforts to restructure the FBR ended up in court due to mishandling.

Cabinet ministers have questioned the impact of the restructuring exercise on Pakistan’s low tax-to-GDP ratio. The Ministry of Finance has stated that the government aims to reduce the fiscal deficit by expanding the tax net, rationalising subsidies, and promoting economic growth. However, rising debt servicing costs pose a significant challenge.

The ministry, on Thursday, also defended the caretaker government’s borrowing during the past seven months, stating that it focused on fiscal consolidation measures, including revenue mobilisation and expenditure rationalisation.

The finance ministry stated that the interim government shifted its domestic borrowing to long-term debt securities to finance the fiscal deficit. However, this move occurred at a time when interest rates were at historic highs in Pakistan, highlighting inadequate debt management, as noted by independent analysts.

The ministry further indicated that significant borrowing continued from floating-rate securities among medium to long-term instruments, while fixed-rate instruments were borrowed at an average of 3% to 4% below the policy rate during the interim government’s tenure.

The average time to maturity of domestic debt has increased to around three years by the end of January 2024, in line with targets mentioned in the Medium-Term Debt Management Strategy (MTDS) FY23-FY26.

The share of external debt in total public debt reduced from 38.3% at end-June 2023 to 36.7% at end-December 2023.

No expensive external borrowing was raised from commercial banks and international capital markets during the caretaker government, according to the finance ministry.

Published in The Express Tribune, February 23^rd, 2024.

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